Altria Takes Another Price Hike In The Face Of Declining Volumes

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MO: Altria Group logo
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Altria Group

Quick Take

  • Altria recently announced a hike of $0.07 per pack on other brands for the second time in the year.
  • This reinforces our faith in the company’s price-taking potential to drive short to medium-term earnings growth.
  • We believe that Altria needs to create a hold on the fast-growing e-cigarettes market in order to mitigate the long term risks arising from the shift in consumer preferences towards the new category.

Pricing holds the key to earnings growth for tobacco companies as sales volumes continue to decline on growing excise taxes and other regulatory pressures. Altria (NYSE:MO), the largest tobacco company in the U.S., recently announced a price hike on its cigarettes and smokeless tobacco products to be implemented across the U.S., starting December 1. This is the second price hike for the year. [1] We believe that this is a positive sign for Altria’s investors as it highlights the company’s price-taking potential even when the market for traditional cigarettes has been declining at an accelerating pace, partly due to the growing adoption of e-cigarettes.

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The recent price hike could boost Altria’s sales volume in the short run as the retailers are expected to ramp up their inventory levels before the new pricing gets implemented. However, the company needs to establish a strong hold on the fast-growing e-cigarettes market quickly in order to offset the decline in demand for traditional cigarettes from consumers switching over to the niche category.

Altria holds more than a 50% volume share in the U.S. tobacco market. The company’s brand portfolio includes well known names such as Marlboro, Copenhagen, Skoal and Black & Mild. It also markets premium wines sold under various labels including Chateau Ste. Michelle and Columbia Crest. According to our estimates, cigarettes and smokeless tobacco products drive more than 85% of Altria’s stock price.

Our $37 price estimate for Altria is almost in line with its current market price.

See Our Complete Analysis For Altria

Pricing Holds The Key To Earnings Growth

Despite all the challenges faced by the tobacco industry in the U.S., its dollar value has actually grown steadily over the years. This is because the Big Tobacco companies have been able to more than offset the decline in cigarette consumption through pricing measures. The sticky nature of the demand for cigarettes due to its inherent addictive nature and consumer brand loyalties has greatly helped the tobacco companies. Altria, the biggest player in the market, has been able to grow its adjusted operating income, primarily from the sale of cigarettes at more than 8% CAGR since 2009. Marlboro, the company’s flagship brand, commands more than 42% of the retail market for cigarettes in the U.S. and has held the leading position in the market for more than 30 years now. Such brand equity allows Altria to lead in pricing measures and increase its value share in the shrinking tobacco industry while maintaining a decent volume share growth as well. [2]

The company recently reduced off-invoice promotional allowances on its Marlboro and L&M brands while raising list prices on the other brands. This is the second price hike for the year as a similar measure was also implemented by the company in June. At $0.07 a pack, the price hike is expected to boost Altria’s revenue per cigarette by ~3% y-o-y. Because excise taxes have remained fairy stable over the last year, the hike in list prices would imply a much higher y-o-y gain in revenues net of excise taxes. For example, Altria’s revenues from the sale of cigarettes grew by more than 3% y-o-y during the third quarter, but its revenues net of excise taxes grew by ~5% over the same period. This translates into even higher net earnings growth for the company due to relatively stable commodity prices and lower operating costs. [2]

Cigarette Volumes Continue To Decline

The traditional cigarettes market faces a very challenging regulatory environment marked by highly restrictive marketing rules and ever-increasing indirect taxes. Moreover, the growing use of smokeless tobacco products and electronic cigarettes due to increasing health consciousness among consumers is further aggravating the operating conditions of cigarette manufacturers. The consumption of traditional cigarettes in the U.S. has dropped by ~10% since 2009. We expect it to drop by another 4% y-o-y this year on the growing adoption of e-cigarettes, which have tripled to more than $1.5 billion in sales this year. [3]

This accelerating trend could potentially pose a stiff challenge to Altria in the long run. We therefore believe that the company needs to establish a strong hold in the fast-growing e-cigarettes market in order to mitigate some of the risks arising from the new category. (See: Altria Could Add $5 Billion In Value By Selling E-Cigarettes)

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Altria Joins Lorillard in Another Price Increase, csnews.com []
  2. Altria SEC Filings, sec.gov [] []
  3. E-Cigarette Marketing Seen Threatened By FDA Scrutiny, bloomberg.com []